Changing Business Models for CPAs

You can look at virtually every website for any accounting firm today and you will find that the current business model revolves around taxation, auditing, accounting, consulting and financial services.

This business model has driven higher and higher growth for decades, to the point that the strategy to grow a CPA firm is not to provide clients with services they want outside of finance, but to acquire other CPA firms and cannibalize their customers.

Business models have been this way since the introduction of accrual accounting in the 19th century, before computers, when bookkeeping was performed by actual bookkeepers in ledgers. It was a daunting task, and it still is, and the accounting profession requires a lot of talent.

When computers entered a CPA’s business model, it had both positive and negative effects. ERP systems all start as digital accounting systems and then integrate data from all departments so that a single point of entry makes for an efficient database. This is positive by automating the tax and accounting elements of the business model, but still requires the expertise of a CPA. Still did it?

Over time, software technology began to encroach on another element of the CPA business model, auditing, one of the firm’s main sources of profit.

Auditors will focus on using metrics that analyze financial records and statements that show business performance, while the CPA’s audit report is a key element that shows viability. Programmers can now automate the entire audit process, including reporting.

Advances in technology have “transformed” the CPA’s entire business model work, rather than reforming one element, from bookkeeping and evaluating financial data to preparing financial statements and even auditing books.

It is far more effective for a CEO or executive to transform an organization after an annual continuous improvement project across the organization, which is associated with a CPA firm, rather than pushing the transformation to the industry as it is today.

In most cases, this shift has commoditized the profit structure of elements of the CPA business model to the point that smaller bookkeeping and accounting firms can offer the same services at a lower price than CPAs, and they are thriving. In terms of pricing, CPAs find that most of their services are elastic rather than inelastic, which is a business model issue.

Demand for a professionally certified workforce is under pressure, with lower levels of accounting expertise now the rule. This is against the grain of most professional CPA firms, but it’s no different than how a doctor feels about a more professional care team.

However, a phenomenon is taking place that is having another potentially disruptive effect on the business model of CPA firms.

According to a recent Wall Street Journal Article“In the past two years, more than 300,000 American accountants and auditors have left their jobs, a drop of 17%, and fewer and fewer college students entering the field cannot fill this gap.” To begin with, young professionals ages 25 to 34 and mid-career professionals ages 45 to 54 are also leaving in large numbers, often turning to finance and technology jobs or labor statistics.

But remember, for most CPA firms, the only way to grow is not to strengthen the services they provide to clients. No, growth is achieved through acquisitions and cannibalization of combined customers. Going forward, mergers may not bring in a steady stream of high-paying customers, nor will they be able to raise prices while maintaining their customer base.

The short-term solution is to reduce costs for companies, and CPA firms are doing just that.

another recent Wall Street Journal Article Discusses a nationwide shortage of accountants, which is prompting small and medium-sized businesses to hire overseas to meet the need for staff to “audit the books of U.S. companies and prepare U.S. tax returns.”

This is called outsourcing. Problem solved? wrong!

As management consultants, we guide executives to make the right decisions, with the first critical competency to address real problems, not apparent problems or symptoms.

It appears that CPA firms are addressing symptoms rather than a change in the CPA firm’s business model. Think about Uber, and how changes in the business model of the personal transportation market affect every taxi company in the world.

The same seems to be happening in the CPA profession. Business models are constantly shifting, and alternatives for customers are long overdue.

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